Wishful Thinking

I’m a big believer in optimism. And I’m a glass-half-full kinda girl. But being an optimist doesn’t mean that I believe bad things can’t happen to good people. That’s why one of my mantras is, “Plan like a pessimist so you can live like an optimist.”

Being optimistic and being delusional are very different things. Making financial decisions based on what you hope will happen isn’t optimism. It’s wishful thinking, and it can get you into a whole lotta hot water.

Did you buy a home that eats up more than 50% of your income? Did you transfer your consumer debt to your mortgage by refinancing and then put your credit cards back into play? Did you take advantage of a buy-now-pay-later and then let it expire without having made the full repayment? Then you, darling one, fall into the category of Wishful Thinker.

People who believe that real estate values will always go up, that $1,000 is all they need as an emergency fund, or that there will be plenty of time to save for retirement later are Wishful Thinkers. There’s a reason for the saying, “What goes up must come down.” And how will $1000 keep a roof over your head and food on the table if the caca hits the fan? As for the argument that there’s plenty of time to save, maybe. But you’ll have to save a whack-load more money to make up for the time you lost for compounding to work for you. Start saving in your 20’s and you’ll have to stash away just 6% of your net income. Wait until you’re in your 40’s and the number triples to 18%.

Investing is another world in which wishful thinking does us no good. Chasing hot performers is how Wishful Thinkers end up losing lots of money. Did you know that our brains are hardwired to over-react to recent events? This works if you’re a forager. If you’re looking for food the best place to look is where an animal was yesterday. But the economy is a different kettle of fish and no matter how often you hear that the markets are rationale, they are not.

Despite dire warnings not to do so, we continue to use our forager brains to consider what will happen next in the economy. No matter how much the experts talk about market cycles, investors cling to the idea, ill formed, that wherever we are today in the markets, that’s where we’ll stay. So if we’re in a rising market, the market will continue to soar, and a downturn in the cycle can make people run screaming for the exits.

Smart investors don’t buy anything they can’t explain to a 12-year-old. They only choose options that match their investment time horizons. And they understand their risk tolerance. If you have no idea what I’m talking about, time to go do some studying before you leap into investing.

Wishful Thinkers feel bullet-proof. Sadly, no one is. From divorce to illness, from job loss to creditors calling loans, there’s a lot of room for disaster in our everyday lives. Even the little things like increases in costs for gas, food, or interest, can add up to a problem, especially when pay cheques haven’t grown much.

If you find yourself turning to your credit cards or line of credit, or living in overdraft because rising costs are straining your ability to get to the end of the month before you get to the end of the money, maybe part of the problem is your wishful thinking. Flying by the seat of your pants may have worked when you always managed to stay in the black, but if your expenses have grown past your income, you’ve got to start paying attention to where your money is going. And you’re going to have to start making some tough choices.

Perhaps the wishful thinking I am most impatient with comes from the people who believe it’s okay to spend money they haven’t yet earned. They blithely head out to the malls, using their credit cards to buy New-and-Shiny. Or they take home a new couch, new bedroom set, new television with the intention of paying it off in 18 months. Or they figure as long as they can work the payment into their budget, there’s nothing wrong with getting the one with all the bells and whistles.

Here’s a newsbreak: if you can’t afford it today it’s just going to be worse tomorrow when you add on the interest costs.

Buying anything on credit when you know you won’t be able to pay the bill in full at the end of the month means you think that you will be able to afford to pay the bill later. More wishful thinking.